First, the good news. The jump in the UK’s economic output in the third quarter of 2020 was the fastest on record. GDP in the July to September period was 15.5% higher than in the second quarter, when the impact of the first Covid lockdown was greatest.
Now the not so good news. The rise was a bit less than forecast and weaker than in the eurozone and in America. The UK economy remains nearly 10% smaller than it was in the last three months of 2019, whereas our main rivals are back within 5% of their previous level.
What’s worrying about the numbers is the trend. The rate of growth was already slowing towards the end of the third quarter recovery. In September, output was only 1.1% higher than in August. In the most important part of the economy - services - growth fell from 2.4% in August to just 1% as the Chancellor’s Eat Out to Help Out scheme came to a close and employers started to anticipate the end of furlough by laying workers off.
The implementation of a second four-week lockdown is bound to set the recovery back on its heels. A double-dip recession, with a modest slowdown in activity in the last three months of the year, looks probable.
The Bank of England was aware of the direction of travel when it announced an expansion of its bond-buying stimulus programme last week. The forecasters in Threadneedle Street don’t expect the economy to get back to its pre-pandemic level until the start of 2022. Next year looks like being a long and choppy period of catch-up.
Of course, today’s data is backward looking. It reflects the world before this week’s unexpected positive news on a potential vaccine. As the stock market reaction over the past few days has shown, investors think that an anti-Covid jab could be a game-changer.
This is undoubtedly true, but experts warn that a global roll-out of a vaccine could be some way off. The swing back towards reliable growth stocks in the past 24 hours or so emphasises that the road to recovery is not going to be smooth.
This is doubly the case in the UK where Covid is just one headwind. We also have to face the uncertainty of the Brexit process. Here the news flow is mixed at best, with the UK and EU struggling to find common ground on key areas of disagreement such as fishing rights and state aid.
So, how should people face these contradictory forces?
We are all trying to work out what the long-term implications will be of all the various moving parts in the economy and markets. And the short answer is we simply don’t know whether 2021 will be the year in which we get quickly back to normal or suffer a form of economic Long Covid.
Does the vaccine change everything? Probably, but its timing is extremely uncertain. We don’t know how quickly enough jabs can be brought to market to create that fabled herd immunity that might allow us all to get back to our normal lives.
Meanwhile, does a cure invalidate the digital revolution that has fuelled the outperformance of all things tech this year? Probably not. The changes in 2020 have certainly been accelerated by the pandemic but the move to a more online existence, at work and in the rest of our lives too, was happening anyway. The reason to own the pandemic beneficiary stocks has not disappeared overnight.
And finally, what about the UK’s position globally? Yes, Brexit is likely to take the edge off economic growth in Britain in the years ahead, particularly in the immediate aftermath of the UK leaving the EU in January. But much of this bad news is already priced into a market which has underperformed many others, not just this year but for a decade or more.
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